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Friday, October 08, 2010
CNBC's Larry Kudlow sounds alarm on coming US Dollar collapse
Many of us free market types (Austrian school adherents and otherwise) have been saying this for years, and now we see the mainstream cluing in. But is it too late?
The stupid Democrat in this video insists that the collapse of the US manufacturing industry is to be blamed on China's managed trade policies, and thus advocates for the US instituting it's own managed trade polices to protect American manufacturers. This is of course, weasel wording for punitive import tariffing.
We've heard this story before, and it totally ignores the fundamental structural issues in the US economy.
There is no debating that the lop-sided trading relationship between China and the US is creating an absolutely disastrous situation. But this is a symptom of the US's own economic policies. Not a situation created merely by China managing it's trade.
The US government has, for nearly a third of a century, through inflationary subsidy, fuelled the drive for home ownership and investment in the service-oriented economy, effectively pricing the manufacturing industry out of the equation.
Why do any hard work, when you can simply borrow your way to prosperity on a credit card, working in a non-exportable service job? The fact is, this has been a pie-in-the-sky American dream from the start, and it's relied on continuous monetary inflation to keep this consumer debt bubble afloat for thirty years.
The rest of the world is implicated, too. In that, it "bought in" to the American debt bubble, by lining up in droves to sell bonds to Americans to fund mortgages and consumer debt.
American consumers were more than happy to take those record low interest rates, run off to Best Buy and Wal-Mart and stock their homes with electronics and other consumer goods.
Foreign bond investors kept sending the money because they believed, falsely, that the sky was the limit for real estate prices.
Worse, the US has seemingly permanently fooled itself into believing that this cycle of consumer borrowing and buying is the lynchpin of the US economy. In fooling itself that this is the case, it has adopted economic policies that subsidize spending and consumption, and discourage the act of saving and capital investment. This is why there is no manufacturing base in the United States. Not because of China's trade policies.
America is as much of a managed economy as China is. No matter how much people convince themselves otherwise, there is nothing "free market" about a nation with state-managed asset prices in real estate and other asset classes, via monetary inflation, buying and holding of idle supply, and engaging in direct intervention into the equity markets in order that prices going up. All in the guise of raising investor and consumer "confidence" so that everyone keeps borrowing and spending.
Moreover, we've learned these lessons before. In the Great Depression -- with Hoover's disastrous trade policies which arguably turned what would have been a short and sharp recession into the a depression -- and in the 1970s.
What people have failed to realize, is that today's situation is far worse than either of those situations. In both of the previous cases, the US had the means of capital creation -- a manufacturing base -- to fall back on. When the shit hits the fan this time, consumers will be faced with mass shortages of basic consumer goods and will have no way to obtain them in any short-order, due to prohibitive import costs as a result of a severely weakened dollar.
Certainly, when this happens, investment in manufacturing will skyrocket -- out of necessity. But there will be no quick fix. America will experience a depression, followed by -- at the very least -- a decade of economic malaise, if not complete social and political breakdown.
Posted by Mike Brock on October 8, 2010 in Economic freedom | Permalink
Comments
Excellent post Mike.
I would add two points:
1) In addition to what you've mentioned, manufacturing has been decimated in the U.S. because of costly, arbitrary regulations.
2) Many of Hoover's policies were much worse than his trade policies.
Posted by: Charles | 2010-10-08 11:38:40 AM
The regulatory environment has certainly contributed. But it's worth noting that countries like Japan, Sweden and Germany, have maintained export-oriented and manufacturing oriented economies under more oppressive regulation.
When I compare the US with other economies like this, it makes me hesitant to jump on the taxation and regulation bandwagon.
While I do certainly believe the US is over taxed and over regulated, I at least think it's important to understand the problems and not overstate or understate problems if possible
Posted by: Mike Brock | 2010-10-08 11:48:13 AM
I'm not suggesting a shift in order of importance here. Just adding an extra layer to your narrative.
I would also suggest that a comparison of regulations in the U.S., Japan, Sweden, and Germany would be warranted. I consider Sweden and Japan to be more business friendly in terms of regulations than the U.S., for example. Did you know that you literally cannot get a mine built in the U.S. today (not that Japan and Sweden have a mining industry)? I don't know the German regulatory environment well enough to comment. So I'd say I'm on two bandwagons at the same time.
Posted by: Charles | 2010-10-08 12:06:11 PM
I guess what I'm saying is that the regulatory environment in the U.S. is much more anti-manufacturing than the many other countries in the world.
Posted by: Charles | 2010-10-08 12:08:34 PM
Fair enough,
I just think it's important to focus on the inflationary monetary system, personally. I believe a market can sustain regulation and taxation far more resiliently than it can this inflationary money system we have.
Inflation is far more distortionary. And it's the element of our state intrusion into the economy which the average person pays least attention to.
Posted by: Mike Brock | 2010-10-08 12:24:51 PM
Agreed.
Posted by: Charles | 2010-10-08 12:45:48 PM
If the stated value, of "Federal" Reserve notes, declines enough with respect to copper and nickel, the 1946-2010 U.S. Mint nickels, composed of cupronickel alloy, could become somewhat rare in mass circulation.
The October 8th metal value of these nickels is "$0.0617794" or 123.55% of face value, according to the "United States Circulating Coinage Intrinsic Value Table" at Coinflation.com.
Posted by: David Wozney | 2010-10-08 1:23:14 PM
Mike, much of the discussion about monetary policy is above my head, but the post is excellent. We will be looking back at some point in the future to say you called this one right.
One thing I am curious about though is your statement:
"There is no debating that the lop-sided trading relationship between China and the US is creating an absolutely disastrous situation. But this is a symptom of the US's own economic policies. Not a situation created merely by China managing it's trade."
You are not referring to trade deficit's are you? Surely the disasterous situation is the one created by China on it's citizens, and by America, on it's. Not by American policies on China and Chinese policies on America.
Also, I'm not sure what you mean by:
"This is why there is no manufacturing base in the United States."
From the link http://cafehayek.com/2010/09/a-convenient-myth.html ...
In 2008, the value of U.S. manufacturing output – measured in inflation-adjusted dollars – was 84 percent percent higher than it was in 1980. In 2009, despite the severe recession, the real value of U.S. manufacturing output was still nearly 60 percent higher than it was three decades earlier....
Posted by: TM | 2010-10-08 1:51:53 PM
You are not referring to trade deficit's are you? Surely the disasterous situation is the one created by China on it's citizens, and by America, on it's. Not by American policies on China and Chinese policies on America.
No. That's not what I'm saying. I'm saying the US policies, which discourage saving and encourage borrowing have wiped out the capital that would normally support a strong manufacturing base. And also -- on a cultural front -- predisposed American's to believing that manufacturing is a job for poor and undeveloped countries.
China is exploiting a hole that the US made for it. But it's no longer exploitive. China is now simply subsidizing the US to it's own determent right now.
In 2008, the value of U.S. manufacturing output – measured in inflation-adjusted dollars – was 84 percent percent higher than it was in 1980. In 2009, despite the severe recession, the real value of U.S. manufacturing output was still nearly 60 percent higher than it was three decades earlier....
You're measuring in absolute terms here. The overal size of economic activity grew far more in real terms.
In 1980, a majority of the US economy was production. Today the productive size of the economy is less than 30%. Consumer spending now accounts for about 70%.
The difference is manifested in consumer debt and the US trade deficit. That's where the balance has gone.
Posted by: Mike Brock | 2010-10-08 2:26:09 PM
Couple of things to note:
1) US manufacturing has been growing steadily for the past 40 years - with a single year of contraction in 2007/2008. Employment in an industry isn't an indication of industry health, value of production is. Spend a few at Cafe Hayek and read Don Boudreaux's simple and concise descriptions of the US manufacturing base. e.g. today he posted: http://cafehayek.com/2010/10/they-do-have-a-comparative-advantage-at-imprisoning-political-dissenters.html
2) A cheap Renminbi improves the disposable income of the average American at the expense of the typical Chinese peasant. Again, Cafe Hayek is a good reference destination: http://cafehayek.com/2010/10/real-cash-balance-effect.html
Posted by: Todd Kuipers | 2010-10-08 2:53:00 PM
Let it be clear to everyone that if the US fails, everyone fails. The US is the only barrier against the forces of evil and destruction of Liberty. I speak of the Islamics and their fellow travellers in western democracies. Cowardly politicians have sold their nations to the wahabbists of Saudi Arabia. These are the enemies of everyone and only the US can be counted on to defeat them. The US remains pure of intent and will, the same purity that defeated Nazi Germany and the Soviets. The world would have been enslaved otherwise.
Posted by: AB Patriot | 2010-10-08 9:17:25 PM
Let it be clear to everyone that if the US fails, everyone fails.
Nope.
Posted by: Mike Brock | 2010-10-10 8:08:18 PM
Mike Brock
It light of the historical fact that you owe your Liberty to the US, it time to pay the US back, you deadbeat. I suggest a fair payback, with interest, would be 9000% or your income for the next 100,000 years. Of course, you can will you indebtiness to your children, who likely will also owe a considerable personal debt to the US for their Liberty. Ultimately, the world owes the US far more than the US owes them. No doubt, the US will happily retreat from all the ungrateful sloths (like you) you expect the US to defend their freedom. The US will abandon you to the Islamists, who I have no doubt with shackle and enslave you to serve their perverted order. Of course, given your obviously obtuse state of mind, and likely retardation, you have devalued you Liberty, like far too many.
Posted by: AB Patriot | 2010-10-11 11:10:35 AM
AB Patriot,
The last time I checked, Canada was involved in World War II as well. I do not owe the US 9000% of my income for the next 100,000 years. You are simply an insane nutcase.
Posted by: Mike Brock | 2010-10-11 11:35:04 AM
AB Patriot ,its not good for the US to fail, it will massively effect everybody, but unfortunately they did it to themselves and there still making things worse.
The US is probably the most powerful country in the history of the world because of Liberty but they have abandoned that, they dont need islamists to do them harm they have done it to themselves.
Posted by: don b | 2010-10-11 12:20:10 PM
don b
The point is that there is no one to stop the Islamists. As we have already seen in Europe, particularly in the Netherlands, politicians have surrendered to the Islamists. Sharia Law rules the streets of Amsterdam, enforced by Islamic gangs. The police are powerless to act, and the local politicians live under threat of reprisal from the Islamists and cowardly federal politicians. And it is the same in many other countries in Europe. The UK is close to falling to Islam at this time. Saudi wahhabists are building their influence and politicians are selling the UK to them. Only US stands strong in purpose to defend you Liberty.
Posted by: AB Patriot | 2010-10-11 1:34:58 PM
Mike Brock
What rot! The US single-handledly defeated Nazi Germany and Imperial Japan, before turning to single-handedly crushing the Soviets. All other players offered their puny efforts and pithy resources. Only the US stood strong to defend all the enemies that opposed Liberty and sought to enslave the world. Canada stop the Nazis? Like the way Poland did? What utter bile and nonsense spewed from a retarded mind. You OWE the US your Liberty and Freedom; you owe them all your wealth and your life. You, like so many others, are an utter failure defending your Liberty. Heck, you don't even understand that you are free because the US assured and protected your Liberty.
Posted by: AB Patriot | 2010-10-11 1:39:51 PM
I recognized the US's role in promoting liberty. But what you are saying is completely antithetical to liberty. What you are saying, is there should only be freedom for American citizens, and everyone else should just be slaves so American consumers can consume.
My grandfather lost 3 of his 5 brothers in World War II, our country contributed our part and we do not owe the US the right to infinite debt.
You are just an insane psychopath.
You're not even making any sense. If the US brought liberty to the world as you claim, then how could it expect is to subsidize them? That's like international socialism. It's contradictory. It just proves how you are a jingoistic nutcase.
Posted by: Mike Brock | 2010-10-11 2:19:37 PM
AB patriot , sorry my point is, if the US dosnt change course nothing will matter they will have successfully destroyed themselves.
I dont see them standing up to islamists threat, whether there right or wrong on going into Iraq they have created a lot of enemies in the process,and as they become indebted to the world they will create more bad will and enemies, well lets just hope it dosnt get that bad.
Posted by: don b | 2010-10-11 3:53:35 PM
Sharia Law rules the streets of Amsterdam, enforced by Islamic gangs.
Posted by: AB Patriot | 2010-10-11 1:34:58 PM
Bullshit. I was in Amsterdam 3 weeks ago and that's so far from the truth it's laughable. You don't have a clue what you're talking about.
Funny though how AB Patriot surfaces just as Zebulon Punk disappeared.
Posted by: The Stig | 2010-10-11 4:05:05 PM
I miss that zebbi punk character, he was a bizarre.
Posted by: don b | 2010-10-11 9:57:54 PM
Lee Munson very bisa against china for no valid reason other than he is of indian origin.
Posted by: eddie | 2010-11-24 1:53:45 AM
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